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Thursday, May 16, 2019, 00:37

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Escalation of Sino-US trade dispute will impact on HK

By Peter Liang

Thursday, May 16, 2019, 00:37By Peter Liang

Despite what US President Donald Trump said about his “very warm” relationship with Beijing, the escalation of the trade dispute between the world’s two largest economies is widely expected to cast a long shadow over the Hong Kong economy and its asset markets.

Hardest hit will be those Hong Kong manufacturers who have factories in the Pearl River Delta region who have expressed great concern about the increased US tariffs on $200 billion worth of Chinese mainland imports. Some of them were quoted in local media reports as saying they would lose their competitiveness in the US market against imports from rivals in other economies in the region.

The resulting property rush can help negate much of the ill effect of falling overseas demands by pushing up fixed asset expenditure in infrastructure development and building and construction. For that reason, nobody should worry too much about the Hong Kong economy which can cope with any challenge based on the strength of its property market alone

They are not the only people in the external trade sector that will take a hit. Total exports, which consist mainly of re-exports to and from the mainland, have been sliding continuously for many months.

Although the trade sector is of much reduced importance to the overall economy than before, its decline can have a wide-ranging impact on a wide range of businesses in finance, logistics and other related services. The drag on the economy was made obvious by the drastic slowdown in growth in the first quarter of this year.

There is little the government can do and it has already done all it can to help local manufacturers who have yet to move their factories to other low-cost production bases in the region. Following the tariff hike last week, the government announced the extension of the discounted exporters’ insurance to provide cheaper cover for potential losses.

At a press briefing, Secretary for Commerce and Economic Development Edward Yau Tang-wah said that despite a fall in exports, there was a boost in confidence which, he added, would fall following the tariff hike. “(Hong Kong’s) trade and economic performance this year will very much depend on macro factors and negotiations between China and the US,” he said.

The escalation of the trade dispute has also short circuited the stock market rally. In less than a week, the benchmark indicator lost much of the accumulated gains it had made in the previous month, sliding back to about 28,000 from above 30,000. Although the market regained its footing on Friday, analysts have largely remained pessimistic about the outlook.

There is really little to be bullish about. Reportedly, the US has set a one-month deadline for further talks to produce results before slapping 25-percent tax on additional Chinese imports. Both sides confirmed that further negotiations would take place. But no date has been set yet for future meetings.

US investors appear to have been bored by the trade dispute that has been dragging on for almost a year. They are focusing their attention on strong economic growth and a robust labor market. The Dow staged a gain of 114 points on Friday, reversing the downward trend of previous sessions.

But the trade dispute is not something investors in the Hong Kong market can put aside so easily because of its direct impact on market fundamentals — particularly corporate earnings.

To be sure, the economic stimulating policy, particularly tax cuts, can help boost the profits of many mainland enterprises, especially the larger ones that are State-owned or government-controlled. But the many private manufacturing companies, including those in the Pearl River Delta region, will take a severe blow in a prolonged trade dispute with the US, their largest market. This could lead to a sharp fall in demand for financial and trade-related services from Hong Kong.

Projections of a further slowdown in economic growth in 2019 have not fazed prospective homebuyers, encouraged by the prospects of low interest rates and plentiful credit. Despite static wages, demand for workers has remained high, or even pressing, and the unemployment rate is staying low. Against this backdrop, the trade dispute is nothing but distant rumbles that pose no immediate threat.

The biggest concern for the average families who don’t already own properties is that if they don’t buy now, they will never be able to afford doing so later. The resulting property rush can help negate much of the ill effect of falling overseas demands by pushing up fixed asset expenditure in infrastructure development and building and construction.

For that reason, nobody should worry too much about the Hong Kong economy which can cope with any challenge based on the strength of its property market alone.

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